New Strategies for Prosperity in a Low Oil Era | GCF 2016
With the price of oil now at below $30 a barrel, oil economies face a lot of challenges. As an emerging market, Saudi Arabia has a lot at stake in this equation, especially if it wants to remain competitive and make the shift towards becoming a knowledge economy.
Published in December 2015, the McKinsey Global Institute's report "Saudi Arabia Beyond Oil: The Investment and Productivity Transformation" has gone viral. In essence, the report predicted that if oil prices dropped to $50 a barrel, Saudi Arabia would face severe economic challenges - unless it implemented drastic changes.
On the second day of the Global Competitiveness Forum 2016 (GCF) in Riyadh, speakers and panelists exhausted the findings of the report and extensively discussed the subject of economic recovery, prosperity and, more importantly, sustainability, from different points of view.
Of course, technology and innovation occupied a key role in all the strategies proposed, but the essential questions revolved around the macro-ecosystem for these strategies to work effectively.
A Gap Between Oil Supply and Demand
First things first, "low oil" means low oil prices, not low oil supply. According to Amin Nasser, President and CEO of the Saudi Arabian Oil Company (Saudi Aramco), this drop in prices is due to an increasing supply of additional unconventional oil flooding the market and exceeding demand by almost 3 million barrels.
This is not a sustainable situation, said Nasser, explaining that marginal barrels will need to be removed from the market. Consequently, prices will go up relatively by end-2016, without necessarily returning to $100 a barrel.
Reactive Policy Changes: Yes, But...
According to Tarek Elmasry, Managing Director of the Middle East Office of McKinsey & Company, Saudi Arabia has been one of the most profitable markets for investors over the last 15 years, with an annual dividend yield of 3.8% for international investments, compared to a 1.8% average yield in emerging markets.
Of course, this growth has been largely state- and oil-driven, and Elmasry explained that this historic model will not continue to work in Saudi Arabia: "The solution involves migrating from a state-driven economy to a market-driven one."
"Modest adjustments, and even more than modest adjustments, actually have very bad economic outcomes for the Kingdom," said Elmasry. For instance, freezing labor rates and spending, or reducing expat labor will still cause a drop in household income, over 22% unemployment, and over 120% debt-to-GDP, to list only a few problems.
It is clear that opportunity should come from non-oil, sectors. For example, increased spending on mining exploration and extraction could produce higher resource yields and revenues, according to the McKinsey report. Increased healthcare spending is another line of opportunity. Saudi Arabia currently has only 11 healthcare workers per thousandth (compared to the G20 average of 22) with two thirds of these workers being non-nationals.
Speakers from different traditional sectors at GCF 2016 mentioned additional reactive strategies to dampen the effect of low oil prices, including a focus on affordable housing (1.5 million new units announced), airline services, large investments in manufacturing facilities, exploring renewable energy sources, etc.
Changing Perspectives: Social Welfare Before Prosperity
Despite the hopeful perspective of most attendees at the GCF 2016, the general consensus is that a reactive stance is nowhere close to promising prosperity, particularly if oil prices remain low.
Change, real change, needs to be visceral and paradigm-shifting. Here are some interesting takeaways from the speakers at the GCF 2016:
1. Thinking beyond borders
Alaa M. Naseif, Project Manager of Knowledge Family at Al Aghar Group, stressed the need to change mentalities and encourage innovation, even at the individual level: "Globalization starts at home."
It is not enough that Saudi-bred talents are able to find state-sponsored job opportunities in Saudi Arabia, she explained, they should be able to find opportunities internationally. According to the McKinsey report, household income in Saudi Arabia rose by 75% between 2003 and 2013, but this was largely driven by the public sector since the government employs more than two-thirds of all Saudi workers.
In the race for competitiveness, tech innovation needs to think beyond national borders and address new markets. Moving to such a market-driven knowledge economy entails openness to new ideas and people. Of course, less government dependence would contribute to shaping a true entrepreneurial spirit and creating real opportunities, not simply state employment opportunities.
2. Starting small
For Jacqueline Novogratz, founder and CEO of Acumen, there is a pressing need to address the repercussions of low oil prices on the short term in order to find solutions that guarantee social welfare. To achieve this, Acumen advocates "moral leadership", which can be summarized as a bottom-up approach to recovery and development starting from an end-user perspective.
In concrete terms, for instance, it would not be enough to simply freeze labor rates; end users at the lower rung of the social ladder would have to be addressed as a market demographic with its own targeted services and products, not as the recipients of state-sponsored aid.